When mortgage cover falls down on the job

Are payment protection policies a panacea? Jean Eaglesham has doubts and so do some insiders

MORTGAGE rates may be at their lowest level for 30 years but the feelgood factor is still proving elusive. The mood will not have been lightened by the recent Labour Party attack on Government housing policy, highlighting the fact that around 50,000 homes are still being repossessed each year.

Job insecurity, and the fear of mortgage arrears and repossessions, is a big factor in the housing market's failure to recover. But some borrowers may be inadvertently worsening the risks by switching lenders. Remortgages may save money but switching lenders reduces the already limited state help available if you lose your job (see right).

There is, however, a silver lining - at least for insurers. Last October's cuts in state support provided an ideal platform for them to sell mortgage payment protection policies, insurance that pays your mortgage if you become unemployed or (in most cases) cannot work because of illness or disability. Mortgage lenders have also responded by promoting their own policies more heavily; many discounted and fixed-rate deals now offer six to 12 months of free cover as part of the package. More generally the terms of many policies have been improved and premiums cut. "You get a lot more cover now for less money," according to Steve Devine of Pinnacle, which underwrites many of the lenders' policies. Some lenders, such as Birmingham Midshires and Britannia, are experimenting with selling the insurance to existing, as well as new, borrowers.

Skipton and Market Harborough societies have gone further by offering free, albeit fairly limited, unemployment cover. "We believe we are doing more for the housing market than simply reducing interest rates," says David Charlton, of Skipton. "We think it is a great statement for mutuality [ownership of the society by its customers, called members rather than by shareholders] because it helps existing as well as new borrowers."

But other lenders, which are also trying to fly the flag of mutuality by offering added extras to members, are not convinced. David Homes of Yorkshire Building Society says "free insurance only benefits a small proportion of our members".

Similarly, a Bradford & Bingley spokeswoman says: "The problem is that the people who take up this cover are the ones most likely to claim on it. We think it is quite an expensive use of members' money in terms of what you get for it."

The fact that a number of lenders think this insurance is relatively poor value should ring alarm bells with borrowers. Even Sue Anderson of the Council of Mortgage Lenders, the lenders' trade body, says: "It is not a universal panacea, although we would urge people to think seriously about it."

Research commissioned last year by the Department of Environment found that while job loss was the single most common cause of arrears, there was no evidence that mortgage payment protection policies were an effective mechanism for preventing arrears, nor that the policies had the potential to give a widely available, affordable and effective safety net.

Certainly there are still serious drawbacks.The first is that the insurance is only short term, even though most borrowers think they are buying to cover a long-term risk. Policies can be reviewed annually, or even monthly, resulting in increased premiums, reduced benefits or even a borrower's cover being cancelled. In the last recession, many policyholders faced a sharp increase in premiums, often in return for less cover. In some cases their insurer pulled out of the market. If another sharp rise in the jobless occurs, the same thing is likely to happen again.

The second big problem is the range of exclusions. Common exclusions to beware of include:

q Becoming unemployed soon after taking out the policy. The typical initial qualifying period is around three months.

q Taking out a policy when you were aware, "or ought to have been aware", of the threat of impending redundancy, in the words of one insurance policy.

q Part-time workers who work fewer than 16 hours.

q Contract and short-term workers. The only exception is where you have worked continuously for the same employer for two or three years

q Anyone with a medical condition when they took out the policy that could lead them to give up work.

The self-employed are covered, but the conditions for claiming can be onerous.

Even if you clear all these hurdles, it is still questionable whether the level of cover justifies the premiums. You generally get, at most, 12 monthly payments per claim, although some lenders offer the option of increasing this to two years' worth of payments in return for a higher premium.

If you believe you would struggle with your mortgage should you lose your job, this insurance is worth considering. But if, for example, your partner is also working or you have a reasonable level of savings, the cover looks less attractive.

Certainly, the limited free cover on offer with certain mortgage deals should not be a deciding factor in choosing that deal. If you are worried about how you would cope if you were unable to work for a long period because of illness rather than unemployment then an alternative, albeit more expensive option, is permanent health insurance.

q Jean Eaglesham works for `Investors Chronicle'.

Don't rely on the state

IF YOU lose your job and can't pay your mortgage, don't assume the welfare state will help. Following cuts last October, the level of state support available is limited, to say the least. If you have savings of more than pounds 8,000 or your partner works, you almost certainly won't get any help.

Even if you do qualify, the payments are limited:

q Borrowers who took out a mortgage before 1 October 1995 get nothing for the first two months they are registered as unemployed, half their mortgage interest paid for the next four months, and all of the interest paid thereafter.

q Borrowers who took out a mortgage after 1 October 1995 - and that includes people who switched lenders after this date - get nothing for the first nine months, and all of the interest thereafter. Borrowers who have remortgaged with their existing lender since October and, importantly, not increased the size of their loan remain covered under the old rules.

These payments cover the interest on the first pounds 100,000 of the loan only. They don't cover capital repayments or payments into a linked savings vehicle, such as an endowment policy.

Major lenders' policies

Initial exclusion Waiting period Monthly cost

unemployment after claim2 for mortgages

(days)1 (days) pounds 50,0003 75,0003

Unemployment cover only

Abbey National 56 28 13.18 20.42

Nationwide 90 30 11.50 17.81

Unemployment, accident and sickness cover

Abbey National 56 28 19.43 30.10

Alliance & Leicester 60 30 14.56 22.55

Birmingham Midshires 120 60 18.91 29.30

Bradford & Bingley 90 30 19.17 29.70

Halifax 90 30 14.14 21.91

Lloyds Bank 90 45 12.50 to 19.36 to 26.704 41.364

Nationwide 90 30 15.86 24.58

Woolwich 905 60 14.91 23.10

All premiums quoted are for maximum 12 monthly payments per claim.

1 Period after taking out policy during which you are not covered for unemployment.

2 Period after making claim before eligible for any payment.

3 Assuming mortgage rate of 7.49 per cent and level of benefit covers monthly interest repayment only.

4 Premium varies depending on age, sex and occupation.

5 For new customers; 180 days for existing mortgage holders.

News
peopleHowards' Way actress, and former mistress of Jeffrey Archer, was 60
Sport
Romelu Lukaku puts pen to paper
sport
News
Robyn Lawley
people
Arts and Entertainment
Unhappy days: Resistance spy turned Nobel prize winner Samuel Beckett
books
PROMOTED VIDEO
News
people
Life and Style
Troy Baker and Ashley Johnson voice the show’s heroes
gamingOnce stilted and melodramatic, Hollywood is giving acting in video games a makeover
News
i100
Life and Style
Phones will be able to monitor your health, from blood pressure to heart rate, and even book a doctor’s appointment for you
techCould our smartphones soon be diagnosing diseases via Health Kit and Google Fit?
News
people
Extras
indybest
Travel
Ryan taming: the Celtic Tiger carrier has been trying to improve its image
travelRyanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Sport
Usain Bolt confirms he will run in both the heats and the finals of the men's relay at the Commonwealth Games
commonwealth games
Life and Style
Slim pickings: Spanx premium denim collection
fashionBillionaire founder of Spanx launches range of jeans that offers 'thigh-trimming construction'
News
Sabina Altynbekova has said she wants to be famous for playing volleyball, not her looks
people
News
i100
Life and Style
tech'World's first man-made leaves' could use photosynthesis to help astronauts breathe
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

BA/PM,EMIR/Dodd-Frank,London,£450-650P/D

£450 - £650 per day + competitive: Orgtel: My client, a leading bank, is curre...

Senior Analyst - ALM Data - Banking - Halifax

£350 - £400 per day + competitive: Orgtel: Senior Analyst, ALM Data, Halifax, ...

Java developer - Banking - London - Up to £600/day

£500 - £600 per day: Orgtel: Java developer - Banking - London - Up to £600/d...

Day In a Page

Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices
Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

Could smartphones soon be diagnosing diseases?

Health Kit and Google Fit have been described as "the beginning of a health revolution"
Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

Can we learn to love Ryanair again?

Four recent travellers give their verdicts on the carrier's improved customer service
Billionaire founder of Spanx launches range of jeans that offers

Spanx launches range of jeans

The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
10 best over-ear headphones

Aural pleasure: 10 best over-ear headphones

Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

Commonwealth Games

David Millar ready to serve up gold for his beloved Scotland in the end
UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

UCI Mountain Bike World Cup

Downhill all the way to the top for the Atherton siblings
Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star